A longer version of the review published in New Zealand Books Autumn 2007. p.11.
Keywords: Macroeconomics & Money;
This history of the Reserve Bank is not a conventional institutional history, as was Gary Hawke’s earlier history of the Bank (until 1973) which it revises. The study is more like Roberto Rabel’s New Zealand and the Vietnam War, which is concerned with the development of a policy.
Yet the approaches are quite different. Rabel is a professional historian who distances himself from those involved, while remaining sympathetic to the difficulties the officials faced. Many readers may finish the book a little uncertain as to his personal beliefs, but with a sense that many possible viewpoints have been fairly covered.
On the other hand the Reserve Bank history was written with a commitment to the actual policy development, using the Bank’s economic framework to evaluate it. Alternatives are given short shrift. Writing in the Independent, Alan Catt points out that the critics such as Bryan Philpott. Merv Pope, David Sheppard and Jan Whitwell are all misrepresented and dismissed. Alas, they are dead and cannot defend themselves. Paul Dalziel may think he is treated equally cavalierly, while I know the book misrepresents my argument that the Rogernomes were extremist. (It redeems itself a few pages on by describing how the Treasury wanted to turn the Reserve Bank into a corporation with some private shareholding. Perhaps the authors do not think that is extreme.)
Other critics are ignored, like the thesis of Peter Harris that in the 1990s the Reserve Bank had a threshold unemployment rate of 5 percent. He argued that as it was neared the threshold, the Bank tightened its monetary stance. It is an important issue, especially as it does not seem to apply in this decade. (The unemployment rate is currently 3.6 percent.) Was Harris wrong, or have conditions changed?
The ignored may have a quite different perspective. One former director of the Reserve Bank grumbled to me that some of the book’s descriptions of what happened are wrong. It would appear that only one director was consulted, other than one who was an author. (Unlike Hawke’s book there is no list of directors, officers or ministers. The appendices consists only of a list of Governors and some tired and unintelligible graphs.)
In fact very few were consulted – fewer than Rabel did, despite his study being of events a couple of decades earlier. For example, David Caygill was not interviewed despite being the Associate Minister of Finance responsible for the Bank and later Minister of Finance during much of the policy change the history focusses on. The book is happy to criticise Robert Muldoon – he is considered fair game in economic circles – but a professional historian would at least have consulted his official biographer, Barry Gustafson.
The book’s third sentence highlight’s the authors’ ‘independence’ with ‘[t]he History Group of the Ministry of Culture and Heritage oversaw the project and ensured the independence of the authors.’ (Rabel does not need to mention his independence: his book demonstrates it.)
The principle author, John Singleton, is a reader in economic history at Victoria University of Wellington. There are three subsidiary authors although a few sentences on, the book says ‘the authors take collective responsibility for the interpretations and conclusions arrived at each chapter.’ One of the three is Gary Hawke who wrote the earlier history of the Reserve Bank. Frank Holmes is strangely distanced from the collective, as when it writes ‘according to Frank Holmes, he [Ray White] was “one of nature’s gentleman”’. I take it the concern is Arthur Grimes.
Grimes was an employee of the Reserve Bank between 1979 and 1993, the period that book devotes most space to, and currently chairs of the Reserve Bank’s Board of Directors. The authors claim their views ‘are not necessarily shared by the management or Board’ but it is unclear what that means when one of the writers holds such a senior position in the Bank. Apparently Grimes was commissioned to write the book before he joined the Bank’s Board. The History Group should have insisted he discontinue his authorial role at that point. Perceptions of independence are important.
In the end we have to conclude that the views in the book are those of the authors who have given their own account of what has happened, and have not felt constrained by anyone else’s.
While accepting the authors’ independent views, the reader will be sometimes struck by a tone of deference. Consider: ‘[O]n several occasions [Governor] Brash had sought Richardson’s views on the interpretation of the [Policy Targets] Agreement. If these meetings had become public knowledge, observers might have concluded that Brash was seeking instructions, although that was not the case.’ (p.183) I would have liked to know more about what was discussed and why communication by letters, as provided for in the statute, was not used. But the point to be made here is the last six words sounds more like the Bank’s official position, than the judgement of scholars.
The book has a very strange voice. Consider ‘Jim Bolger [at the time Leader of the Opposition] and his closest ally, Bill Birch, accepted the [1989 Reserve Bank] Act in a general sense, but did not share [Ruth] Richardson’s zeal.’ (p.179) There is no footnote to the paragraph where this, and other political judgements, appear. None of the three (all still alive) were interviewed. How did the authors know? Are they are relating the Wellington gossip, or are they failing to cite their sources?
One is left with the uneasy feeling that the story of the bank is only half told. Curiously little attention is paid to the Reserve Bank Act of 1964, despite it being the statutory basis for over half of the period the book covers. That Act required the Bank to be concerned with ‘the maintenance and promotion of economic and social welfare in New Zealand having regard to the desirability of promoting the highest degree of production, trade and employment and of maintaining a stable internal price level.’
Most economists would argue that the Bank did not have enough policy instruments to pursue such multiple objectives and in any case monetary instruments do not target effectively some of the objectives. How did the Bank deal with this paradox, especially in an era of faltering production, high unemployment and higher inflation? If the book is any guide, it ignored its legislation.
While such questions may seem of historical interest (but the book is meant to be a history). suppose the current legislation proves unworkable. Would the Bank ignore it also? This is not solely an academic question. The book describes the conflict between a central bank’s eternal role of ensuring the integrity of the monetary system and its statutory role of targeting inflation. Consider the possibility of an even greater financial crash than occurred in 1987, when despite its 1964 statute, the Bank chose to ignore the rising unemployment, and instead continued with its exclusive pursuit of price stability. Suppose that the crash was so great the Bank had to chose between maintaining price stability, and injecting liquidity to preserve the financial sector, with the probability that this would cause inflation. What would it do?
The book ignores the sharemarket crash. Instead it focuses on the politics of the period including ‘Labour was returned to power in August 1987 with an increased majority [of seats – its vote margin was halved] which suggests that many voters, including traditional Labour supporters, were prepared to give Douglas and his supporters more time’. (p.118) Any careful analysis of the election outcome would come to a different conclusion. The willingness of the book to indulge in casual political analysis not only involves naivety, but errors. It makes Jim Anderton a cabinet minister in 1989. (p.123) To which the almost 100,000 traditional Labour voters who failed to turn up to the polls in 1987, might wish ‘if only’, as might the many other Labour supporters who voted on the basis of Lange’s promise that in its second term Labour would behave differently.
Errors are not confined to politics. An illustration reports ‘New Zealand’s economy entered the 1970s in reasonable shape … the prices of primary exports were high.’ (p.34) In fact the terms of trade – the price of exports (most were then primary) relative to import prices – was in 1970 the lowest they had been since 1947. More generally, Chapter 2 on the economy in the 1970s is trite and unrevealing. (But the chapter on financial stability – dealing with failing financial institutions – is gripping.)
There is a tendency to rewrite history. ‘[T]he Bank was impressed by the potency of exchange rate channel [in 1987].’ (p.117) There is no footnote, so the reader cannot confirm the claim. (In numerous places, the book lacks footnotes where a statement needs evidence.) But an interchange between myself and Governor Brash in The Listener in 1994 an interchange between myself and Governor Brash in in 1994, left the impression that the Bank gave little weight to that this channel’s misuse could damage the tradeable (exporting and import substituting ) sector and hence the economy’s growth prospects. The Bank’s thinking seems more sensitive to this channel today.
There is much ignoring of the record. The book describes how initially after the Muldoon era, the Bank pursued the targeting of monetary aggregates. The details need not detain us, but it involves a purist Chicago (Friedman) approach to monetary policy. Some moderate critics advised against it. As expected, pure monetary control proved unworkable, and was abandoned, even though that story is not related.
Instead we have a triumphalist account, until the mid-1990s, where never a mistake is made. I would have better appreciated the true story: of a bunch of officials in an unfamiliar environment, desperately struggling to make sense of what was going on, disagreeing among themselves, making mistakes, learning from them, and on the whole doing reasonably well.
Why the change of approach from the mid 1990s? Perhaps the authors were not as closely connected with the Bank by then. So we are told of the (mathematically confused) Monetary Conditions Index muddle and even that the Bank made ‘errors of judgement in 1997-8,’ which caused a short recession. But there is no discussion on the Bank’s culpability in the long recession of 1986 to 1993, nor on what seemed to be a lost of monetary control in 1987, which conveniently – but probably accidentally – helped Labour win that year’s election, at the cost of exacerbating the sharemarket crash which occurred a little after.
The focus of the book is on the development and enactment of the 1989 Reserve Bank Act and its operational implementation. The story the book tells is an honourable one, of how the Bank developed a new and internationally innovative constitutional framework for monetary policy which has been successful – so far. But despite the inclusion of various cartoons which portray the Bank as all-powerful, the ‘independence’ of the book’s title may not be the right term.
For its independence in narrowly confined to the operation of monetary policy. Keynes famously remarked that he hoped that one day economists would be like dentists. As with your dentist, the client (the government) says what is wanted and leaves the dentist to make the technical decisions. The Bank is accountable. Governor Don Brash did not have an ambition to retire to a less powerful position when he left the Bank for parliament. (Brash’s leaving is not mentioned. In a curious echo of a 2005 National Party election campaign photo-opportunity, a coloured illustration shows Brash outside cooking a ‘mean barbeque’.)
Sometimes the Bank’s interpretation of the independence was odd. At one stage there was an almost religious commitment to avoid coordinating fiscal and monetary policy to the extent that the Bank and Treasury officials did not know what each was thinking. Happily that sort of nonsense has ended.
How robust is this new framework? Will it work under less benign circumstances – such as those which precipitated the Great Depression, or the 1966 terms of trade shock, or … Let us just hope that it will never be so tested.
Instead the book is dominated by an admiring preference for the more extreme versions of market liberalisation policies with little self-awareness of how policy has had to change because of its limitations. One hopes today’s Reserve Bankers are a more subtle. And let’s hope too, they are more respectful of the critics. Underneath the book’s story is one in which the Bank has had to continually changed it operations as circumstances change, or where its current theory has been found wanting. The critics were not always wrong.
Rabel points out that in the debate on involvement in Vietnam the arguments of those outside officialdom largely fell on deaf ears, but shrewdly adds ‘[t]he anti-war movement may well have lost almost all the battles in its struggles with the government during the Vietnam conflict, but there are strong grounds for concluding that it ultimately won the all-important local struggle for “hearts and minds”.’ This history of the Reserve Bank provides four economists’ perspective of the events, but lacks the magisterial overview of Rabel, or of McKinnon’s history of the Treasury. Had it, it might have concluded that while the Bank officials were deaf to their critics (if the book is accurate in this respect) the force of events meant that the policies and theories they held had to be adapted, often in the direction their critics had argued.